Loan disbursal by microfinance institutions is expected to grow 25% year-on-year in the current financial year due to a favourable macro-economic environment, CareEdge said in a recent report.
The microfinance segment grew 18% y-o-y in 2021-22 and 20% y-o-y in 2022-23 after it experienced a slowdown in 2020-21 due to challenges posed by the Covid-19 pandemic.
The microfinance industry has experienced a shift in market share, with NBFC-MFIs overtaking banks for the first time in four years, the report said.
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As of December 31, microfinanciers contributed around 38% to the outstanding microfinance loans, higher than the 36% contributed by banks.
In 2022, the Reserve Bank of India (RBI) issued guidelines regarding microfinance institutions, wherein entities must have at least 75% of assets in microfinance in order to qualify as an NBFC-MFI instead of the earlier 85%.
The central bank also enabled these lenders to create a policy to price credit, a move that removed the cap on pricing of microfinance loans.
The RBI norms may lead to a gradual increase in the share of individual, micro, small and medium enterprises (MSMEs) in the portfolio mix in the medium term, the report said.
The net interest margins of microfinanciers rose to around 10.45% in April-December from around 9% in 2020-21 due to the removal of the lending rate cap regime in the revised regulations by the RBI and improved collection efficiencies.
This improvement in margins and lower credit costs has lifted the profitability of these microfinance institutions.
The return on average assets of microfinanciers rose to 2.3% in April-December from 1.4% in 2021-22.
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The report said while profitability is expected to improve further due to higher margins, reduced credit costs and improved collection efficiency, it is likely to remain lower than the pre-Covid level in 2023-24.
The collection efficiency of microfinanciers is expected to remain high, which will lead to improvement in overall asset quality. However, high inflation, interest rates and subsequent impact of Covid-19 are key monitorables.